Acadia Realty Trust - Q2 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Q2 2023 Acadia Realty Trust Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mackenzie Tepper. Please go ahead.

Mackenzie Teper (Intern, Marketing Department)

Good morning, and thank you for joining us for the second quarter 2023 Acadia Realty Trust Earnings Conference Call. My name is Mackenzie Tepper, and I am an intern in our marketing department. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities Exchange Act of 1934, and actual results may differ materially from those indicated by such forward-looking statements. Due to a variety of risks and uncertainties, including those disclosed in the company's most recent Form 10-K and other periodic filings with the SEC, forward-looking statements speak only as of the date of this call, August 2, 2023, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures, including funds from operations and net operating income.

Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your rounds to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. Now, it is my pleasure to turn the call over to Ken Bernstein, President and Chief Executive Officer, who will begin today's management remarks.

Ken Bernstein (President and CEO)

Thank you. Great job, Mackenzie. Thank you to you and all of the summer interns. It's been a pleasure to work with all of you. Welcome, everyone. I'll give a few comments, then I'm gonna turn the call over to Stuart and then to John. As you can see in our earnings release, we had another solid quarter. Same property NOI growth was a strong 5%, and our earnings were ahead of forecast as well. This is not just one good quarter in isolation. For more than two years now, our same property NOI growth has averaged just under 7%, and we've raised our earnings forecast six times. Notwithstanding the most anticipated recession in my career, and the fact that retailer quarter-over-quarter performance has been choppy, retailers are continuing to look past any short-term shifts in consumer demand and are continuing to pursue key locations.

On our last couple of earnings calls, I discussed the likely drivers of this continued growth, and while I run the risk of this feeling like Groundhog Day, let me briefly reinforce a few key drivers. In terms of macro trends, first of all, the threat of the retail Armageddon has passed. While online retailing is here to stay, retailers recognize that physical stores are their most profitable channel in an omni-channel world. Second, tenant demand, especially in our key corridors, is quickly outpacing existing supply, and retailers are stepping up to secure these must-have locations. Whether it's brands establishing their own stores or luxury retailers continuing to double down on key streets, the demand is there, and the rental growth is following.

More micro or specific to our portfolio, the combination of increased tenant demand, coupled with several hundred basis points of potential occupancy gain in our street portfolio, positions us for several years of above-average growth. While there's solid growth throughout our portfolio, both suburban and street, a further differentiator for us is the continued strong growth we are seeing in our key streets. As Stuart will discuss, this growth contrasts significantly with a narrative of shoppers moving out of key cities or the negative impact of hybrid work on retail in markets like New York. In fact, over the past year, as vacancies have been spoken for, market rent growth for the majority of our street portfolio is continuing to accelerate. Soho, Williamsburg, M Street, Rush Walton, Armitage, Melrose Place, Henderson, Greenwich, Westport.

These corridors are not only performing better than pre-COVID, but notwithstanding macro headwinds, tenant demand for our locations is not declining. It's not leveling off, it's increasing. When demand increases, along with adding occupancy, there are additional ways we can further drive growth. One example, in Soho, at one of our locations on the corner of Prince and Broadway, we signed a lease for that space in October of 2021 at a rent that exceeded pre-COVID rents and was a positive indicator for the rebound of Soho. However, recently we were able to negotiate the recapture of the space, and last week, less than two years later, we executed a new lease at a 45% spread to the prior lease. John will discuss the significant economic impact of this lease, but all of this bodes well for our continued growth.

Another driver of additional growth is from fair market value resets, which is a feature unique to the street portion of our portfolio. Not only do our street leases have higher annual contractual growth, the way these FMV provisions work is, upon a tenant exercising its renewal option, the rent resets to the greater of fair market value or a fixed percentage. This year, for the first time in a while, we have achieved resets ranging from increases of about 20%, up to nearly 50% increases above prior rent. All of this simply reinforces our view that not only are our internal growth forecasts of 5%-10% on track, but as John will discuss, we see upside potential beyond simply remaining on track.

To be clear, our growth assumptions also include a sober outlook for our re-tenantings in slower-to-recover markets, such as San Francisco or North Michigan Avenue, as well as conservative credit loss, if and when the looming recession becomes a reality. Even after taking this into account, we expect our leasing progress to more than compensate for any of these re-tenantings. Turning now to external growth and the transaction markets. Given the volatility in the capital markets and borrowing costs significantly higher than two years ago, transactional activity remained muted last quarter, as many sellers are still on the sidelines. Nevertheless, we are starting to see a gradual increase in deal flow, and we are hopeful that we'll be able to close on some compelling and accretive opportunities this year.

Since it doesn't take much volume to move the needle for us, even a few acquisitions, whether on balance sheet in conjunction with capital recycling, or utilizing our institutional capital relationships, this can add meaningfully to our external growth. In July, Fund V acquired Cypress Creek in Tampa, Florida, for just under $50 million. Consistent with our other Fund V investments, going in yield was in the low 8s, and we expect levered mid-teens IRR on this transaction. This center is well leased, with anchors including Burlington Coat Factory, Total Wine, HomeGoods, and over time, there's ability to add value through re-leasing opportunities as well. The team remains active with several deals under review, and we will be successful in deploying the remaining of capital in Fund V, even in this quiet market.

More importantly, to the extent that additional opportunities arise, we're in a position to leverage our institutional relationships for continued growth. To conclude, we recognize that macro news headlines continue to create uncertainty and concern for commercial real estate in general. Nevertheless, our leasing fundamentals remain strong, and our internal growth is exceeding our expectations. Even though this strong growth has been showing up for a couple of years now, we still have several years of tailwinds on internal growth in front of us. Along with this strong internal growth, the uncertainty in the capital markets is beginning to create interesting investment opportunities that will enable us to add external earnings growth to our strong internal growth. With that, I'd like to thank the team for their hard work this last quarter, and I will turn the call over to Stuart.

Stuart Seeley (Senior Managing Director of Strategy and Public Markets)

Thank you, Ken. I will spend a few minutes addressing the narrative and press reports suggesting that a new hybrid work paradigm is impacting street retail. There is a view held by some that there must be headwinds for urban retail in places like Soho in New York or Melrose Place in L.A., since these cities are experiencing weak office attendance or changing commuting trends. Such views gain momentum with reports and articles linking the stalled return to office and hybrid work with negative implications for all urban retail, without specifics. These reports generally conflate amenity-oriented retail located in office-dense submarkets, which are dependent on office workers and commuters, with dynamic retail corridors, which have completely different traffic drivers. Office attendance is just not relevant for the vast majority of our portfolio. Under 5% of our annual base rent is from tenants which we believe are office worker-dependent.

Now, the data does show that as a result of hybrid work, foot traffic is still significantly below pre-pandemic levels in office-oriented central business districts, such as Midtown Manhattan. At the same time, what we see in our key retail corridors is that, one, foot traffic is virtually unchanged, and two, tenant demand and rents are stronger than pre-COVID. We are seeing diminished availability, and we are benefiting from multiple tenants competing for spaces. We have a highly differentiated street portfolio in key high-growth corridors, such as Soho and Williamsburg in New York City, Armitage Ave and Rush Walton in Chicago, Greenwich Ave and Westport in Connecticut, Georgetown in D.C., and Melrose in L.A. We have examined statistics which are segmented by submarkets. For example, we looked at foot traffic data in four New York City submarkets: Midtown, the Financial District, Soho, and Williamsburg.

Year-to-date, compared to the same months in 2019, pre-pandemic, foot traffic was down 27% in Midtown and down 32% in the Financial District. Over that same period, foot traffic was only down 1% in Soho, and it was up 6% in Williamsburg. While the foot traffic is about flat in Soho, as Ken highlighted, demand for our space is stronger than pre-COVID. According to Cushman & Wakefield, the occupancy rate in Soho has increased over 10% from pre-COVID at 4Q 2019. Also, despite reports of migration away from New York City, apartment rents and occupancy are at near peaks, with rents up over 6% from June of last year. This strength is not limited to New York City.

In the Gold Coast of Chicago, Anine Bing, an aspirational luxury brand, had a very strong opening in the past few weeks, with the highest sales volume in its 20-store chain. In Washington, D.C., Alo Yoga had a very successful opening of its flagship store in our M Street, Georgetown portfolio. As an aside, we have a signed lease for another flagship Alo Yoga at our fund asset at 717 North Michigan Ave in Chicago, which will open soon. Also, in Georgetown, at our Wisconsin Avenue redevelopment, we completed the retail leasing and have reached 100% lease up. In L.A., on Melrose Place, in the past four months, we have had three leases with these fair market value rent resets, and the average increase was 29%. One final point, not all occupancy and not all occupancy pickup is created equal.

While our overall portfolio is 92.2% leased and 95.2% occupied. Let me rephrase. 92.2% occupied and 95.2% leased. Our street portfolio is currently 85% occupied and 88.5% leased. The NOI gain through this lease up will be disproportionately impactful to our bottom line. Our average in-place street rent is $84.50 per sq ft, as compared with our overall portfolio average in-place rent of $32.50. Based on our current leasing activity, including the street leases within our signed, not open pipeline, we expect this differential to widen out further. Now, I will turn the call over to John.

John Gottfried (EVP and CFO)

Thanks, Stuart, and good morning. We had another outstanding quarter with each of our key operating metrics exceeding our expectations, resulting in another strong beat for the quarter and raising our full-year earnings guidance. This call marks the seventh anniversary that I've been fortunate enough to sit in the seat, and I can say without hesitation, and by a long shot, that this is the strongest leasing environment I've experienced during my tenure. The demand for our space is extraordinary, whether it's in SoHo or Williamsburg in New York City, Georgetown in D.C., Melrose Place in L.A., or Armitage Avenue, or the Gold Coast in Chicago.

With that demand, it's pushing rents, and our portfolio is well positioned to capture that growth, whether it's from multiple tenants bidding for the same space, such as what we saw with the opportunistic retenanting that we completed in Soho last week, or through our ability to capture outsized growth from fair market resets, such as we did on several occasions on Melrose Place in L.A. This is enabling us to not only gain further confidence in our multi-year growth projections, but seeing real opportunities to exceed them. Now I'll dive into the quarter. Starting with our second quarter FFO before special items. We reported an FFO of $0.36, which significantly beat our quarterly model. The outperformance was driven by better than anticipated operating results within our core portfolio, for both an improvement in tenant recoveries, along with a robust and strengthening leasing environment.

Along with cash recoveries, primarily within our fund portfolio, coming in above our expectations. As highlighted in our release, our quarterly results included an $0.08 non-cash gain associated with the termination of the below-market Bed Bath & Beyond lease at 555 Ninth Street in San Francisco. As we had discussed on the first quarter call, this gain resulted in an incremental $0.05 of unbudgeted FFO, as we had conservatively assumed $0.03 of earnings throughout the year within our initial guidance. Now, while I'm not suggesting this gain deserves any outsized level of prominence, it is worth highlighting that the accounting does capture the economic reality, as it highlights the value created now that we are able to capture market rents well in excess of what Bed Bath was previously paying. Now moving on to our full year guidance.

For the second consecutive quarter, we increased our full year earnings outlook, on an apples-to-apples basis, when stripping out the incremental $0.05 associated with the unbudgeted gain, this gets us to $1.25 at the midpoint, which represents an increase of about 3% above our initial guidance. In terms of our assumptions for tenant credit, given the macro backdrop and lingering risk of a recession, we are continuing to hold what we believe are prudent and conservative levels of reserves within our updated guidance for the balance of the year. Turning now to same-store NOI. Our second quarter same-store NOI of 5% was in line with our expectations, particularly given the headwinds from cash recoveries in the comparable quarter from the prior year.

With year-to-date same-store growth of just under 6%, along with profitable lease up commencing in the second half of the year, our model has us trending towards the upper end of our initial 5%-6% full year guidance, with an opportunity to exceed it. In terms of spreads, we reported GAAP and cash spreads of 22% and 13% respectively for the second quarter. As highlighted in our release, it was our street portfolio that drove this growth with cash spreads in excess of 30% from leases on Armitage Avenue and Lincoln Park in Chicago and Melrose Place in L.A.

It's also worth pointing out that if we were to measure the cash spreads since inception on our street leases, the 30% cash spread from the street increases to over 60% when factoring the contractual rental growth that we received during the lease term, which ranged from 3%-4% annually, along with a compounded annual growth rate, or CAGR, in excess of 6%. As we start the third quarter, we are seeing these same trends continuing, if not actually accelerating on our key streets. As Ken mentioned, I'll provide some of the economics of the Broadway and Prince Street lease that we signed in Soho last week. The 45% cash spread translates to an incremental annual NOI of approximately $900,000 when compared to the prior lease that was signed less than two years ago.

Additionally, inclusive of the payment to terminate the prior lease, as well as the upfront costs associated with tenant improvements and leasing commissions, our payback period is less than a year. Additionally, so far, during the third quarter, inclusive of the Soho lease I just mentioned, we have already signed or renewed nearly $4 million of street leases within our core portfolio at an average cash spread of about 40%. Just to put this in context, given our size, a 40% cash spread on $4 million of ABR generates about 100 basis points of same-store growth and adds more than $0.01 a share, about 1% of incremental FFO growth.

Next, I want to provide a quick update on our multiyear internal growth projection and reaffirm that we continue to see $30 million-$40 million of incremental core NOI growth over the next several years. I'm often asked whether we have any potential upside to those projections, and the short answer is absolutely. In fact, it's playing out. Within those projections, we had assumed conservative assumptions on market rents. Thus, we didn't assume opportunistic re-tenanting, such as we accomplished last week in SoHo, nor do we assume the extraordinary growth from fair market resets within our street leases, as we have experienced in several leases in the past few months on Melrose Place in L.A. Now moving on to core occupancy. In terms of occupancy, our leased occupancy increased 60 basis points to 95.2% at June 30th.

During the quarter, approximately 40 basis points of occupancy commenced, contributing approximately $1.7 million of ABR, predominantly from street leases. Additionally, our leasing team further increased our sequential signed but not open pipeline to 300 basis points at June 30th. This 300 basis points represents $6.8 million of ABR at our share, or about 5% of our in-place core ABR. In terms of anticipated rent commencements on the $6.8 million, we expect that about half of it will commence in the second half of the year, with the vast majority expected to commence during the first quarter of 2024. This represents an acceleration from our prior quarter's estimates, primarily due to our tenants' strong desire to expedite their openings, along with the resolution of supply chain issues.

Please note that given the timing of commencements, we won't get the full benefit in our reported results until the subsequent full annual or quarterly period. I also want to highlight that the $6.8 million of signed but not yet open leases relates solely to our core operating portfolio. Thus, it excludes any core assets of redevelopment, as well as our share of any lease up within our fund portfolio, which if both of these were included, it would double the ABR in our signed but not yet open pipeline at June 30th. I now want to provide a quick update on City Point. From a leasing perspective, we remain well on track with our stabilization plan.

At June 30th, we have approximately 60,000 sq ft of leases signed but not yet open, including Fogo de Chão, Court Sixteen, Dig, the expansion of Alamo, and several others. Our leasing pipeline continues to expand with several new and exciting retailers in advanced stages of negotiations. I also want to give an update on the projected FFO accretion we expect to achieve upon stabilization of the asset. As a reminder, we currently own about 60% of City Point, with the potential to increase our ownership to nearly 100%. As we've said in the past, we anticipate increasing our ownership in City Point over time. While we don't have any specific update at this time, we don't expect a significant impact, if any, to our 2023 guidance.

Keep in mind, the incremental cash outlay, should we have the opportunity to acquire all or a portion of our remaining partner's interest, is not overly significant. If we were to acquire all of the remaining ownership interests, the additional outlay would be about $15 million, after taking into account the $65 million of previously funded partner loans from last year's recapitalization. Upon stabilization, the anticipated earnings accretion relative to our current FFO run rate ranges from about $0.06 if we were to acquire all of the remaining interests, or approximately $0.04 if we maintain our current 60% ownership. This $0.04-$0.06 of projected net accretion factors in all the components of the investment, including the projected NOI growth upon stabilization, the interest income on the partner loans, future funding costs, et cetera.

Please keep in mind that the timing of a partner's decision to convert their interest prior to stabilization of the asset may create some short-term earnings implications, given the structure, but nonetheless, in the near term, we are projecting $0.04-$0.06 of incremental accretion, representing growth of nearly 5% of our current earnings. Lastly, I want to touch on a few items on our balance sheet.

... Our balance sheet remains strong, with no meaningful core maturities for the next several years, and virtually no exposure to base rates within our core until 2027, given our nearly $900 million of interest rate swaps. Within our core portfolio, while the reset in rates was particularly painful, we are optimistic that the worst is behind us. In fact, during the second quarter, we successfully completed about $250 million worth of refinancings and extension of fund loans. As you'll notice within our supplemental, the all-in borrowing costs within our funds remained virtually unchanged from the prior quarter.

All else, all else being equal, given the duration of our debt and interest rate contracts in our core, coupled with the reset of rates within our funds, we expect nominal impacts from interest rates on our, on our earnings over the next several years. In summary, we once again had another very strong quarter, with momentum continuing to build as tenant demand for our locations remains elevated, fueling further confidence in not only achieving but exceeding our multi-year internal growth goals. We will now open up the call for questions.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit yourself to 2 questions and 1 follow-up each. 1 moment for our first question. Our first question will come from Floris van Dijkum of Compass Point Research & Trading. Your line is open.

Floris Van Dijkum (Analyst)

` tags. <edited_transcript> Morning, guys. So nice, nice results. You know, encouraging on what's happening in Soho. Maybe if we can, if you can provide us with a little bit more detail on the, you know, the, the demand you saw from tenants for this space. I believe it was Fila that was in the space before. If you could also give a little bit of, you know, view on, on, on what's happening to lease terms in terms of bumps. Are you seeing any? You know, your peers are all talking about raising bumps in their suburban portfolio. What is, how does that look like for your street spaces?

Maybe also touch upon, in particular, in the, in the, you know, one of your, office, one of the office REITs just sold, an asset, I think, in Spring Street as well. Presumably, you're looking at some of these opportunities as well. Where do you see the, the potential for external, opportunities in, in your, in your street retail portfolio?

Ken Bernstein (President and CEO)

All right. Well, technically, Floris, I think that was more than one question, but let me at least start taking a stab at a few. Let's start with contractual growth. I, I do think that it's gonna be a multi-year education process in terms of in suburbia, getting especially junior anchors accustomed to perhaps a higher growth rate. Given the duration of those leases, even if we are successful, it takes about 50 years when you take into account the options, to turn a shopping center. I'm in favor of it, and I think depending on your view of inflation, I think it would be healthy for us to get higher bumps to keep up with whatever our view of inflation and growth is, but I think that will take a while.

Contrasting that with street retail, that, for historic reasons and otherwise, has generally had about 3% annual contractual growth, which is about 100 basis points higher just in terms of contractual growth, has had fewer option periods. Where the option periods show up, as I mentioned in my remarks, we often can get fair market value reset. All of that enables us to have more, what I have referred to as bites at the apple. Now, I'll concede over the last five, six years, none of that really mattered because we went through a global pandemic, rents were declining, the retail armageddon, and now that's beginning to turn. I do think we will see higher contractual growth in our street portfolio than in our suburban.

We will see more bites at the apple, and thankfully, increased tenant demand is resulting in pretty significant rental growth. Let me use the Soho example. We signed a lease a couple of years ago with Fila. We were very excited about that at the time. We, not only mentioned that it was at a rent that was better than pre-COVID at a time when people were still very concerned, but we also thought it was a healthy spread and made all the sense in the world. Fila was still working through a bunch of its design decisions, and I give our leasing team credit because they were aware of several retailers, both retailers looking to relocate, but as well as new retailers coming into the Soho market, that were interested in the space.

They were able to negotiate a termination at a fair price, which the payback period will be very short, and then sign a very accretive lease. That doesn't happen every day, but those kind of opportunities tend to show up in places like Soho, where the rebound in rents have happened quickly at a time when, as Stuart mentioned, the overall narrative is still negative. I credit our team with creating that incremental close to 100 basis points of growth, and we're working on other situations as well. Again, no promises as to when it shows up or which quarters, but when you have a rebound like that, we spend a lot of time making sure that we're positioning ourselves for it. I'll get into the acquisition market conversation, Floris, later in the Q&A.

I wanna give some other people a chance to ask their questions.

Floris Van Dijkum (Analyst)

If I can follow up, perhaps-

Ken Bernstein (President and CEO)

Sure.

Floris Van Dijkum (Analyst)

With on the funds. I noticed that you, you, you acquired an asset in Tampa. How much more dry powder do you have? Remind us again, I, I believe it's end of the third quarter, or certainly before the end of the year, that you have to invest that. Do you think all of your dry powder will get used up before before that goes away?

Ken Bernstein (President and CEO)

Yes, we do, as it relates to the existing dry powder of Fund V. So I don't think it will go away. I think it will go to good use. We're seeing just enough opportunities. Then, as I mentioned before, to the extent we see additional opportunities, just because it doesn't fit into the existing investment of Fund V, we're gonna find good ways to do those as well.

Floris Van Dijkum (Analyst)

Thanks, Ken.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

One moment for our next question. Our next question will come from Ki Bin Kim of Truist. Your line is open. Now, Kai.

Ki Bin Kim (Analyst)

Hi, can you hear me?

Ken Bernstein (President and CEO)

Yes. Good morning.

Ki Bin Kim (Analyst)

Hi. You guys made some favorable remarks about street retail picking back up. I was wondering if you can just make those comments a little more tangible to us and maybe try to quantify how much improvement you're seeing from tenants?

Ken Bernstein (President and CEO)

Sure. There's two ways that we think about this. One is tenants' long-term sales trajectory, call that tenant health. Then the other is obviously supply and demand, and tenant demand. Soho is just one example, but also Stuart and John talked about in Melrose Place, a fair market reset, in one case, 20%, and another case, 50%. But whether you use a 45% increase in Soho over two years or a 50% increase in Melrose Place over five years, you're seeing a very nice trajectory. Now remember, there's contractual rent growth of 3%-4% on top of those spreads.

In general, I think what you will start reading in the next year or so, because it takes a while for the narrative to change, is that market rents in these must-have markets have grown disproportionate to many of the other markets in our suburban portfolio or otherwise. That's after several tough years, but it is a very healthy and welcomed rebound, and a rebound, frankly, that is in excess of what we had anticipated.

Ki Bin Kim (Analyst)

Okay, when you think about that as it pertains to your Soho lease rate of 81% or M Street at 89%, both of which saw, you know, a nice pick-up in leasing, I guess, how does that strength and demand translate into when these retail corridors can see, just, you know, much more optimistically? Is that a 2024 event? I'm just kind of curious about how long it takes.

Ken Bernstein (President and CEO)

Yeah. What's frustrating in all cases is the amount of time it takes from the point that a retailer says they want space, to the point that they get open. Some of it's within our control, some of it's within the retailer's design control. We are actively negotiating in almost every space in every one of these corridors. My guess is it's a 24 event. I am not changing John's guidance that he walked through in terms of rent commencement dates or otherwise. If you were looking for new space in Soho, as a retailer, you would find most of the spaces are spoken for, and you got to move fast. My guess is, there's active dialogue, and it's not just Soho, we're now thankfully seeing it on Madison Avenue as well. There's active dialogue on most spaces.

Our portfolio should see that as well.

Ki Bin Kim (Analyst)

Okay, when you say Madison Avenue, are you talking about the Sullivan Center type of area?

Ken Bernstein (President and CEO)

No, Madison Avenue in New York City.

Ki Bin Kim (Analyst)

Oh, I'm sorry. Wrong Madison Avenue. Thank you, guys.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

One moment for our next question. Our next question will come from Todd Thomas of KeyBank Capital Markets. Your line is open.

Todd Thomas (Analyst)

Hi, thanks. Good morning. First, first question, I guess, just quickly following up on SoHo and the lease transaction that you discussed at 565 Broadway. Are you seeing other opportunities across the street in urban portfolio to maybe get back space from tenants that are, you know, in place paying rent? and operating where they're either, you know, underperforming or looking to close and, you know, in situations where rents have now risen, where you could profitably backfill. Then-

Speaker 13

Yeah.

Todd Thomas (Analyst)

Sorry if I missed this, but what's the, what's the timing for the commencement at 565 Broadway?

Speaker 13

Yeah, I'll start the, the easy one first. It'll be in the first quarter of next year. First quarter 2024. Now, yes, Todd, we are constantly reviewing, both also for a tenant health perspective. This is not just about capturing upside, this is also about curation and making sure we have the right tenants in the right locations, and when we don't, making these shifts. Now, we do that in the suburbs as well. It's just much more difficult, much more expensive to replace a TJ Maxx with a Burlington Coat. And the kind of spread we need there to make it impactful, just has a different outcome. Tenant review and then the ability to profitably monetize on it requires both strong tenant interest, thankfully, we saw that in the case of Soho, rental increases, and the ability to capture those.

The short answer is yes, the leasing team is actively doing that. It's the pivot that has occurred over the last 12 months, after several tough years, where we are seeing market rent increases, and you will see them, too. This is not just unique to Acadia, in these key streets, that is enabling us to meet the needs of those retailers who want to get in. When retailers say, "You know what, maybe this is not the right space for me," us being able to let them out as well.

Todd Thomas (Analyst)

Okay, and then, second question, John, can, can you discuss, or provide a little bit of detail around the impact, in, in, in the 2023 guidance, and also maybe discuss some considerations around the model for 2024, you know, as it pertains to 664 and 840 North Michigan Avenue, just in terms of the, the lease expirations at those assets and, and, you know, tentative plans around the redevelopment of those, of those assets?

Speaker 13

Yeah. So, Todd, in the-- let's start with the 2024, that's the easy one. That, or both of them are actually pretty, pretty, or very straightforward. 2024, we're not assuming that we get, get those, those leased up. Those are very conservatively pushed out into the later years. You know, what I would say in Chicago, and again, this isn't changing my model, but we are seeing signs of life and tenant interest, et cetera, that's, that's showing up. That's not, not one that I have in, in my model. Our model, the $30 million-$40 million, has, has an incredibly sober expectation of, of what rents we get there. Similar to what we're seeing across other markets, chance to beat that.

In terms of this model, it's the leases start rolling off in back half of the year and into the first part of next year. I would say with the growth we have from the signed but not open, and I, and I also want to highlight that the signed but not open is actually double what the 6.8 I put in there, given the other pieces of that. As Ken mentioned in his remarks, that's going to offset this, this role, and we're continuing to believe that we should be able to produce FFO growth. That's going to be our, our, our same store growth.

Todd Thomas (Analyst)

Okay, that's helpful. Yeah, I, I hear you about the S&O pipeline, but for these two assets, is there, you know, is there any cost capitalization that will begin or that will offset the ABR coming offline as we think about 2024?

Speaker 13

You're gonna make me dig out my CPA again. So Todd, unless we are shoveling in ground, doing active construction work, we are not anticipating capitalizing, in our model, any costs for the balance of this year. Stay tuned for next year. We, you know, haven't put out guidance, but conservatively, my model does not has us flowing through whatever costs of the asset to the bottom line. Anything we would do related to that would be incrementally additive to our FFO. Right now, that's not in our balance of 2023 guidance. As I'm thinking about that statement, where we should have growth in 2024, that's not assuming, you know, we're capitalizing all the costs associated with it.

Todd Thomas (Analyst)

All right, great. Thank you.

Speaker 13

Thanks.

Operator (participant)

One moment. One moment for our next question. Our next question will come from Craig Schmidt of Bank of America Securities. Your line is open.

Craig Schmidt (Analyst)

Hi, this is Lizzie Doykan on for Craig. I just wanted to clarify, apologies if I missed it, on the exact credit loss impacts, just the assumptions for reserves for the full year as a % of revenue again, and how much of that was recognized last quarter?

Speaker 13

Yeah. Lizzie, we're in the, call it, the low $200 range of revenues for the year. We've maintained... You know, I think we were at $270. We've maintained that heightened reserve for the balance of the year. Call it, you know, low $200s as a percentage of revenue against the 6-month revenue. You know, we've kept the, in our numbers, the $275 that we put out at the beginning of the year.

Craig Schmidt (Analyst)

Okay, great. Thanks. Just on the-- you, you mentioned earlier on, the 5% of same-store NOI growth achieved this quarter. You know, that also factors in, you know, the still headwinds from prior period, collections, and, we, we can see that impact, you know, outlined in the supplement. Just curious, I, I guess, if you could quantify more of that impact, how, how, how could we see that start to burn off, you know, going into the rest of the year? Maybe, maybe if you could just discuss expectations around that level of impact.

Speaker 13

I, I think the first half, we really saw the credit loss starting to burn off first half of last year, it, you know, trickled in. Lizzy, I would think that that headwind is largely behind us, which is, in my remarks, suggested that, you know, we are trending towards the upper end, if not-- not, not exceeding it, as that's, that's, you know, that's, that's largely behind us.

Craig Schmidt (Analyst)

Okay, great. That's it for me. Thanks.

Speaker 13

Thanks, Lizzy.

Operator (participant)

One moment for our next question. Our next question will come from Craig Mailman of Citi. Your line is open.

Craig Millman (Analyst)

Hey, good afternoon. maybe I just wanna drill into the $30 million-$40 million of NOI growth expectation that you guys talk about here. I know 75% of that's coming from street and urban. just given the positive commentary around demand and rent growth, I mean, could you walk through maybe kind of some of the basic assumptions there on kind of absorption time frames versus what you may start to see given the demand, some of these unanticipated bumps, like what you're getting at Broadway? Just kind of give us a sense, I mean, this is through 2026. Should we expect that...

I know, John, you said there's potentially room above this, but at least from a timing perspective, I mean, do you guys anticipate that this could come sooner than 2026, given the momentum that you're seeing on the demand and rate side?

Speaker 13

Let me first address this kind of bigger picture, John, while you gather your thoughts, because we have in prior calls, kind of walked through each of the different drivers of the 30-40. Just big picture, and Craig, you're spot on. We are seeing improved retailer demand. We are seeing rents coming in higher than we expected. Counterbalancing that, it still takes a long time to get tenants open, and economists, which I am not one, are still forecasting a recession at some point in the next 12 months.

We're gonna continue to stay very focused on what we think will be exceptionally strong growth if we simply stay on track, we have certainly given indications of the ability to beat that, more so on the rent per foot, as opposed to timing, because timing is very dependent on a variety of issues. With all of those pros and cons in mind, John, the key drivers, and we will have this in our investor deck, we have had it in the past, the key drivers of that 30-40. Yeah. Craig, key drivers are, again, of that 30-40, starting with just the contractual growth. We have the contractual growth, which averages to above 2% over the next several years.

That's, you know, that I think, is that's the easier part in terms of lease up. This is net lease up, and this is after we have the well-known rollovers that we have been talking about for the past couple of years. The net lease up in the earlier years of the model, you know, where we have, you know, the, the North Michigan and the, the Bed Bath rolling, that is going to, in terms of 2024, 2024 is going to be in terms of the growth period, while still, you know, we are seeing that north of the 5%. 2024 is gonna be one where that's going to be where we're gonna feel the offset from the rollover, but the significant lease-up are happening.

You know, I would say, if I had to, and we're not giving 2024 guidance, that 2024 will be towards the lower end of the 5%-10%, as the leases that we've already signed are gonna offset the, the rollover. Then I would say 2025 is really the year of acceleration, Craig, whereas as we, you know, where we're seeing the impact of the rollovers behind us with the lease up that we still have in front of us and getting the right commencements up. I would say, if anything, where I get more comfortable on my, my commentary around growth upside, I think it's in 2025, I feel much better about than I would have last, last quarter. That's lease up is, is a good component of it, and then a handful of redevelopments.

When I say redevelopment, this isn't a redevelopment that we're not assuming that we're doing ground up or incurring capital. These are, starting with City Center in San Francisco, an already leased Whole Foods that we've spent the capital on. You know, several million dollars of growth there that, you know, we think shows up by the time they get their permitting and opening as a 2025 event. A little bit of redevelopment, that's part of that, but not one where what we don't have is capital redevelopments in there. That would be incremental to the $30 million-$40 million. Then the last piece of it is fair market value, and alluded to this in my remarks.

You know, when we did this $30 million-$40 million assumption, that was a spot estimate of market rents at that point in time. When I went to our leasing team wasn't saying, "Hey, on a very good day, and multiple content, what rent it was?

Ken Bernstein (President and CEO)

... guys, if I said you have to get this lease normal course, what would it be? This goes back a couple of years. Craig, that's where we're seeing the upside of this, is that we are beating those, those, those projections, and that's where I see that upside happening. Again, I think that's a 25 event as we get to the, you know, 88% that we have at least in Soho. We have some great space in, in the Gold Coast of Chicago, that that's where I see the upside really kicking in, is from, from these market rents, both in terms of total increasing the $30 million-$40 million, but also, but also timing. You know, why don't I shut it down on there?

I know I threw a lot at you, but as Ken mentioned, we will lay this out more articulately in our, in our investor books.

Craig Millman (Analyst)

No, no, that- that's really helpful. I'm just kind of getting at the fact you guys have a different, have a differentiated strategy, right, in these assets relative to just traditional open air, right? The CapEx, as a % of NOI, is lower. I'm just kind of curious, is that trending even lower given the, the rise in rents? It just sounds like, you know, one of the issues that has been, is your same store has been good, it hasn't necessarily translated into commensurate AFFO growth, given the leverage. It sounds like by 25, that's when the, the switch should flip here, and you should start to see that commensurate AFFO growth relative to your same store growth. Is that a fair way to, to think about this, given the-

Ken Bernstein (President and CEO)

Right

Craig Millman (Analyst)

proportion of,

Ken Bernstein (President and CEO)

Yeah, I would say that we hope in- sorry, he was talking over there, Craig. I would say, I would hope to say that, yeah, we're going to start seeing that in 24, certainly, but, but 25, absolutely.

Craig Millman (Analyst)

Okay, great. Thank you.

Operator (participant)

One moment for our next question. Our next question will be coming from Carlos Conesa of Jefferies. Carlos, your line is open. Again, Carlos, your line is open.

Carlos Consuegra (Analyst)

Oh, that's odd. This is Linda.

Ken Bernstein (President and CEO)

Hi, Linda.

Carlos Consuegra (Analyst)

Hi. My question was on City Point. You know, how are discussions with your partner progressing? You know, at what point would a decision need to be made?

Ken Bernstein (President and CEO)

I think it's going to be a multi-year process, Linda, and as John walked out, walked through, is the delta between our current ownership, 60% and 100, in terms of the earnings, positive earnings impact, is 4% versus 6%. It's not like there's this huge difference. I would expect some of our investors are going to stay in long term, and others will cash out. John also mentioned not a significant cash outlay. While quarter to quarter it might have some impact, I think we really should be thinking about this in a multi-year context over the next 1, 3, 5 years. And, and we'll keep you posted as to that.

More importantly, is the positive leasing traction that John mentioned and getting that open, because whether we own 60% or 100%, it's an important asset, and it is nice to finally see these tailwinds.

Carlos Consuegra (Analyst)

Thanks. Can you talk about what drove cash recoveries above expectations this quarter?

Ken Bernstein (President and CEO)

Yeah, it's really within our funds, Linda. We had, you know, a couple of, we were able to collect on some, some old accounts within our, our fund, the diligence of our legal team. This was really, really, really focused in our, our funds, not, not within our core and certainly not within Same-store.

Carlos Consuegra (Analyst)

Thanks.

Operator (participant)

One moment for our next question. Our next question will come from Michael Mueller of JP Morgan. Your line is open.

Michael Mueller (Analyst)

Yeah, hi. Apologize if I missed this at the beginning of the call, but for the, I guess, the acquisition opportunities that you're starting to see more of, are they predominantly in the funds, or are you seeing somewhere the math is working for, on balance sheet acquisitions?

Ken Bernstein (President and CEO)

In terms of opportunities out there, I'd say it's more across the board than just when we say funds, what we've been doing the last several years in terms of Fund 5. We're starting to see opportunities in street retail. We're starting to see opportunities or continue to see some opportunities in power center. How we fund them, Michael, and making the math work, is either dependent if we're trying to do it on balance sheet, it's probably in conjunction with capital recycling because our stock has gotten beaten up, and it's hard to make that math work on just a straight-up fashion. We have, over the cycles, always found ways, if there's good accretive opportunities, to either capital recycle or leverage our institutional relationships. Let's see where things play out.

I do give our team a lot of credit because they are beginning to see opportunities where there's significant rental growth, and yet the market's not there yet. Where we can see those type of outsized opportunities, it's my job, it's John's job to make sure we find the right way to add them to our portfolio while not increasing our leverage and making sure that they're accretive. That math is always tough at this point in the cycle, but there's also outsized returns at this point in the cycle, and that's why we're kind of looking forward to figuring this out.

Michael Mueller (Analyst)

Got it. Okay, thank you.

Ken Bernstein (President and CEO)

Sure.

Operator (participant)

One moment for our next question. Our next question will come from Paulina Rojas-Schmidt of Green Street. Your line is open.

Paulina Rojas-Schmidt (Analyst)

Good morning. I hope I didn't miss this, regarding the lease you signed in Soho, net effective rent of this new lease compare with the in-place rent you have for similar assets in the neighborhood?

Ken Bernstein (President and CEO)

Paulina, your question is the net effective rent of this compared?

Paulina Rojas-Schmidt (Analyst)

Yeah.

Ken Bernstein (President and CEO)

to the other assets, the other assets in the neighborhood?

Paulina Rojas-Schmidt (Analyst)

Yeah, I'm trying to have a sense of the, of the mark-to-market.

Speaker 13

Yeah. I would start with the limited cost, because it makes it a little bit easier.

Ken Bernstein (President and CEO)

No. I would say that the cost in my remarks, it's under a year. This is a 10-year lease. 10 year, you know, from a payback, so we get paid back within a year. I would say mark to market. Can I maybe help you out, I think, as we think this would go to the rest of our portfolio, but.

Speaker 13

Yeah, I'm trying to say how we extrapolate this to our.

Ken Bernstein (President and CEO)

We, we picked up about 45%. The net effective was very similar to that because it's not an expensive lease, as opposed to in the suburbs, or just by contrast, we celebrated a few years ago getting back a Kmart in Westchester, putting in BJ's. The net effective incremental gain in this one lease is very similar to our share of that large reanchoring in Westchester. The net effective gain is just under $1 million, and that feels pretty darn good. That 45% increase in market rents, and this is our best proxy because we signed that lease 2 years ago. That 45% over 24 months is a pretty clean number. There's no real cost movement. Whether you say rents have increased by 40% net effective on that corner, 42, I think, you know, that's all open for debate.

It's a meaningful rebound, that we are starting to see in multiple locations, and that makes us feel pretty good. Final point around that, there were 3 tenants vying for this space. We could only accommodate 1 in this location. The other 2 are not going to go home. They're going to go find other spots in Soho. I think you're going to see this continued trend, and it's a very nice, healthy rebound. I don't think, nor am I even encouraging us to believe, that you could see this kind of market rent growth for many, many years. That wouldn't even be healthy, but it is very encouraging after several tough years to see a rebound like this.

Paulina Rojas-Schmidt (Analyst)

Yes, a related question. I see in your presentation, you say that your street portfolio has a mark-to-market ranging from 10%-50%. Can you remind me where your key corridors fall within this range?

Ken Bernstein (President and CEO)

Yeah.

Paulina Rojas-Schmidt (Analyst)

Maybe the range, not, not too specific numbers.

Speaker 13

Yeah. Paulina, I think when we think of our key corridors, and we break down our street portfolio, 70% of that street, we're saying these are in these very high growth, high growth markets. That's going to be in New York, that's going to be Soho, that's going to be Williamsburg, that's going to be Melrose Place in, in L.A., it's going to be Georgetown, Westport, Greenwich, Connecticut, and Gold Coast of Chicago and Armitage Avenue. Those are the markets where we see on the low end, you know, somewhere ranging from 10%, but in, in others, as we experience in, in Melrose Place in L.A., 50%.

Ken Bernstein (President and CEO)

It's a question of when do we get to those, those spaces, and that's where it will take some time. After several years of headwind, these kind of increases, are very welcome.

Speaker 13

Paulina, just on that point, what I would say is, and that, that slide, and that's where if I'm visiting the slide in my head or the one you're looking at, that's where we say that we have a 10% CAGR over the next several years. What I will tell you, when we put that slide together, Soho, that we just signed, wasn't built into that. That's, that is incremental to that, that piece, because that was never part of that.

Paulina Rojas-Schmidt (Analyst)

Okay.

Speaker 13

Meaning that growth, where the 10% growth, that, that we were not assuming that in that, that was incremental to that, is my point.

Paulina Rojas-Schmidt (Analyst)

Yes, I understand. Okay, thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Again, as a reminder, to ask a question, please press star one one. I would now like to turn the conference back to Ken, Ken Bernstein, CEO, for closing remarks.

Speaker 13

Thank you for joining us. Everyone, enjoy the remainder of the summer, and we will look forward to speaking to you next quarter.

Operator (participant)

This concludes today's conference call. Thank You for participating. You may now disconnect.